When taxes or subsidies on a particular product are introduced into the general equilibrium model we can be sure that
A)Taxes make the taxed product appear too expensive to its producer
B)Subsidies make the product appear too cheap to its producer
C)We get too much of the subsidized product and too little of the taxed product
D)A more fair allocation of resources is possible

Question

Quizplus · Accepted Answer

Taxes on a product increase its price, reducing demand and supply. Subsidies are payments made by the government to encourage the production or consumption of a good or service. By lowering the cost of production, subsidies increase the supply of a product. As a result, taxes on a product will result in less supply and more demand of the product, while subsidies will result in more supply and less demand. Therefore, we get too much of the subsidized product and too little of the taxed product.

When Taxes or Subsidies on a Particular Product Are Introduced